Turning Used Oil Into Gold

By BARNABY J. FEDER

Published: October 28, 1990

ELGIN, Ill.—
SLOW and steady may win some races, but not the ones where the Safety-Kleen Corporation has been involved.

Safety-Kleen made its mark by moving rapidly to build the only nationwide network for reclaiming waste solvents and other fluids from auto body shops, dry cleaners and other small businesses, then steadily signing up clients to the point that it now makes more than 15,000 pickups daily from about 250,000 customers.

The payoff: Safety-Kleen racked up earnings gains of more than 20 percent for 18 straight years from 1970 through 1988. No company has ever reported such strong earnings growth over such a long period.

But Safety-Kleen stumbled last year, if earnings growth of 8.6 percent -- to $46 million on revenues of $478.1 million -- can be called stumbling.

Since then, Donald W. Brinckman, Safety-Kleen's chief executive throughout the marathon of success, has been anxious to prove that Safety-Kleen can pick up where it left off. The company is pouring money into plants and collection systems for recycling used oil and a wider variety of chemicals, anticipating that quick expansion of capacity will bring a return to growth rates of 20 percent during the environmentally conscious 1990's. This year, the earnings growth rate is expected to top 15 percent.

Investors seem to be betting that Mr. Brinckman can pull it off. Safety-Kleen shares have a price-to-earnings ratio about double the market average, among the highest in the popular waste-handling segment. Last week, Safety-Kleen completed a public offering of three million new shares of its common stock at $33.50 per share. This will allow the company to retire enough debt to cut pre-tax interest expenses by $8 million next year, according to Robert Willm-schen, the company's vice president of finance.

"Money managers love this company and won't listen to analysts who say that it has become overvalued compared to others in the environmental group," said Vishnu Swarup, who follows environmental stocks for Prudential-Bache Securities Inc.

Safety-Kleen fell on its version of hard times when its older businesses could not grow fast enough to support its heavy capital investment in new businesses. And some of the new ventures, particularly oil recycling, have developed more slowly than the company hoped.

"We could see the break coming, but there was still some disappointment," said Mr. Brinckman, a 59-year-old executive who combines a taste for strategy with the drive and imposing bulk of a linebacker.

Mr. Brinckman hopes the company will return to its old growth rate in 1991, when a $55 million refinery the company is building in East Chicago for processing used oil into lube oil and fuel comes on line.

The rapid rise in oil prices brought on by the Iraqi invasion of Kuwait will undoubtedly help, but Safety-Kleen is stifling the natural urge to raise at a comparable clip the price of reclaimed oil from its existing refinery in Breslau, Ontario.

"We are not attempting to optimize our earnings based on the oil price rise," said Joseph F. Knott, the company's president and chief operating officer. "We are not in this for the short term."

One reason for moving slowly on pricing is that Safety-Kleen needs to persuade big oil companies to buy its re-refined oil and sell it under their own names. Safety-Kleen, which is based in this industrial city 35 miles west of Chicago, has neither the marketing expertise nor the name recognition among lube oil buyers to easily unload all the oil it hopes to reclaim.

THE company already collects 80 million gallons of used motor oil and industrial lubricants annually from 65,000 customers, but that represents a small fraction of the total supply, which analysts estimated to be 2 billion gallons annually. The Environmental Protection Agency estimates that 800 million gallons annually are recycled by numerous small companies, some for re-refining and some for blending into fuel oil.

"Our biggest challenge in this business will be to get the big oil companies to realize that it's in their interest for used oil to be handled in an environmentally sound way and to get them into the circle," said Joseph Chaloub, the Safety-Kleen vice president who manages the oil recovery business from Breslau.

Safety-Kleen also needs to close the gap between the 17 cents a gallon it costs to collect used oil and the 12 cents it is currently able to charge businesses for picking it up. The company expects the E.P.A. eventually to issue regulations classifying waste oil as a hazardous waste and creating penalties for improper disposal. Then Safety-Kleen figures there would be fewer disposal options, giving it the leverage to raise pickup prices to between 20 and 25 cents a gallon.

But the E.P.A. has been reluctant to regulate waste oil, in part because much of the oil thrown out is disposed of by individual car owners who would be outside the reach of any regulations it is authorized to adopt. The agency fears that such regulations could backfire -- if service stations charged car owners more for oil changes to cover rising disposal costs, more people might dispose of the oil in the nearest drain.